Let’s review. The Trump rally that began in November ended earlier this month. Markets began to move higher on the Fed news last week and have slumped in the face of potential gridlock in Congress as the repeal and replace of the ACA legislation didn’t have the support to pass. As I mentioned in earlier Market Updates, a failure of the Trump administration to pass its key legislative items would be taken as a disappointment for the markets.
This week has been very sloppy as we finally got a 1% move to the downside which left the indices in a mixed position on Friday. The Dow lost a support level while the S&P, NASDAQ and Russell 2000 all held their ground. However, it wouldn’t take much to push all four indices below their support levels and begin what is likely to be a 5%+ correction. By the way, over the last 67 years the S&P 500 has had a 1% down day every two weeks on average so its not necessarily a signal of a larger correction.
What’s next? The markets have not flipped into correction mode but its a close call that I think will be resolved in the next two trading sessions. The longer term technicals say we are due for a correction so it would be fine by me to get it out of the way before we get into the Q1 earnings announcements.
I don’t expect anymore news on the healthcare legislation in the near future so corporate tax reform will likely be a focal point of Congress and the markets for several weeks. Perhaps the failure to pass healthcare legislation will accelerate the timeline on corporate tax reform which would be a positive for the markets.
My Experience with the ACA (Obamacare)
I thought I would share an example of how being on the ACA can affect the budget of families across America. The failure of the proposed legislation this week has repercussions for many families that are forced to buy insurance on the exchanges where premiums and deductibles are rising rapidly.
As you know, healthcare insurance is now part of your tax filing and the cost for my family was $19,600 in premiums for 2016. Our deductible was roughly $12,500 so let’s put that into perspective as the premiums are paid from income that is after tax. If you assume an average tax rate of 25%, that means we needed to earn $26,133 to pay our premiums for 2016. If we needed to use the full deductible, that would be an additional cost of $12,500 for a total of $32,100 ($19,600 + $12,500). That means we needed a pre-tax income of $42,800 ($32,100/(1-.25%)) to access our first dollar of benefit. Some might say its worth it if something “bad happens” but they don’t realize that our deductible was roughly $5,000 before the ACA exchanges were implemented. A big difference, indeed.
The debate over healthcare may be tabled for now but it will be an issue again when open enrollment comes around next November. Insurance companies are not to blame here as most have lost money on the ACA exchanges and are now dropping to stem their losses. Nothing will change here unless both parties agree to repeal & replace or heavily modify the current legislation.
For the economy, this kind of forced expenditure has the same affect as increased taxes do on consumer spending habits. This could be a big negative to consumer sentiment if we have no change or amendments by open enrollment this November. Stay tuned as this saga isn’t over.
Economic & Central Banking Snippets
- Sales of newly built homes in the US climbed ahead of the key spring selling season in the housing market. New home sales rose 6.1% in February to an annualized pace of 592,000, topping estimates according to Bloomberg. Inventory continues to remain tight at 5.4 months of supply.
- Orders for durable goods rose 1.7% for February after a 2.3% advance in January. However, if we exclude the more volatile transportation equipment the “core” only rose by 0.4%, missing estimates of a 0.6% increase.
- Next week we have Q4 GDP, the Chicago PMI, the PCE and a speech from FED Chair Yellen.
Chart Time!
Market Snippets
- Uber Technologies Inc. said a prominent retail executive it hired as president just six months ago is leaving, the most senior in a string of executive departures as the ride-hailing giant reels from an escalating series of controversies.
- Hedge funds closed in 2016 at the fastest rate since 2008, according to data from Hedge Fund Research. Fund liquidations totaled 1,057 last year, the most since 2008 when 1,471 hedge funds closed.
- General Motors Company (GM) has started a subscription service called Book Cadillac that lets members order up to 18 times from Cadillac’s 10 models for $1,500 a month. The service is currently available only in New York City but will soon be available in Los Angeles and other markets. The company told The Wall Street Journal that the service currently has 5,000 members.
- In a sign of rising jitters on Wall Street, the premium investors demand to hold riskier US corporate bonds climbed on Wednesday to the highest level since the start of the year. As you can see from the chart, junk bonds have enjoyed tightening spreads for years as investors searched for yield with interest rates near zero.
- AT&T Inc. and Verizon Communications Inc. joined a growing number of companies pulling much of their advertising from Google, expanding a controversy over the internet giant’s ad placements on objectionable content and deepening the financial impact on the company even after it announced measures to assuage concerns. (FT)
International Snippets
- Prime Minister Theresa May will write to the European Union on March 29th to formally announcing Britain’s withdrawal from the EU.
- Greece is edging closer to a repeat of the 2015 drama that pushed Europe’s most indebted nation to the edge of economic collapse.
- Credit Suisse has restated its full-year earnings to reflect a charge of 272M francs after reaching a settlement on toxic mortgage securities with the U.S. National Credit Union Administration. The move comes as the bank increased its bonus pool by 6%, defying a trend toward smaller payouts at many of its peers to prevent an exodus of top talent.
- South Korea’s government has offered a $2.6B bailout for cash-strapped Daewoo Shipbuilding and Marine Engineering as the world’s second largest shipbuilder continues to suffer huge losses amid a prolonged industry slump. The bailout is contingent on an agreement by creditors and bondholders to restructure the shipbuilder’s mounting debts by converting as much as 80% of their debt to equity and extend maturities by up to five years.